GOING BEYOND THE BIG CITIES

Apple has an i on Smaller Towns

Top executives unveil plan to enter top 50 tier II and III towns at a meeting with 20 CEOs and senior officials of big retail chains
WRITANKAR MUKHERJEE KOLKATA

Apple may soon be slugging it out in the trenches with Samsung and other smartphone rivals as India country head Maneesh Dhir and telecom business chief Sanjay Kaul seek a rapid increase in the pace of growth in India, a market that it has neglected until recently. While the iPhone has always been an object of desire, Apple wasnt able to make a big dent in India because of pricing issues peculiar to this country handsets arent subsidised by contracts as in other parts of the world. Until recently, this was taken to mean that Apple wasnt really interested in pushing sales in the worlds largest mobile market after China, while companies such as Samsung have pitched their products hard in India. Samsung leads the India smartphone market with a 36% volume share, according to research firm Canalys, while Apples was 2% in the April-June quarter. Apples value share is higher at 5%, it said. To their credit though, Dhir and Kaul have tried to work around their constraints by offering iPhones and other devices on installment, tapping a considerable vein of pent-up demand. Dhir and Kaul are now putting the next piece of their strategy in place. Apple wants to enter smaller Indian cities and towns with iPhones, iPads and iPods as it feels these markets can deliver on its bid to grow fast. Apple has realised that if it wants to grow fast in India, it has to look beyond the metros, said the CEO of one of Indias retail chains. The company wants to grow upwards of 30% year-onyear in India and feels the smaller markets would play a critical role since the aspiration level of Apple products amongst the youth and rich is growing there as well. Dhir joined Apple India three years ago from AOL Inc, where he was the global head for international business, and changed the way Apple was doing business in the country. He hired Kaul from BlackBerry India, expanded the team threefold to more than 150 executives, strengthened the Apple exclusive stores network, shortened the gap between the launch of new models overseas and in India and spearheaded the companys thrust on iPhones. Apple CEO Tim Cook acknowledged the importance of India for the first time in July while announcing the April-June results, declaring that iPhone sales in the country grew 400% during the quarter, albeit on a small base. The company also reported double-digit growth in Indias iPad sales. The new marketing vision for India was unveiled on Monday evening at a meeting with 20 CEOs and senior executives of the countrys top multi-brand telecom and electronic retail chains. Apple Indias senior executives spelt out plans to enter the top 50 tier II and III markets in India by selling its phones, tablets and portable music players at their outlets in an exclusive corner or a shop-inshop, said three people who attended the meeting. They requested anonymity since Apple officials had asked them to keep details of the meeting confidential. Apple spokesperson in London did not respond to a questionnaire emailed on Wednesday.

The move comes amid Samsungs success in the Indian hinterland, said a senior executive with a retail chain, besides which companies such as Sony and Nokia have been able to sell smartphones costing in excess of . 30,000 in areas outside the metros. The 16 GB iPhone 5 costs . 45,500. India pricing for the upcoming iPhone models the 5C and the 5S hasnt been announced yet. Apple wants to set up 100 exclusive standalone stores under the franchisee model in smaller markets. Its scouting for franchise partners and has made proposals to some of the multi-brand retail chains, the executives said. Apple has not set any deadline for setting up these stores in smaller towns in India, but is looking to roll them out this fiscal year. The Apple meeting with retailers was chaired by Dhir and Kaul. Those attending included representatives from retail chains such as Next Retail, Croma, Future Group, Reliance Retail, The Mobile Store, UniverCell Telecom, PlanetM Retail and Spice HotSpot. A senior retail chain executive said it may be a challenge to set up Apple stores in smaller towns, considering the stringent standards for such outlets. Getting such space or investing so much on decor may not yield appropriate return on investment from small-town stores since sales cannot be at par with the stores at metros, even though Apple has committed a margin of 15-20% provided the sales targets are met. It sounds ambitious, he said. Analysts and trade partners feel Apples move to expand its distribution penetration into smaller towns is a sign that the Indian operation is being given greater autonomy. The India operation currently reports to the London office of Apple, which is the hub for Europe, the Middle East and Africa, aside from India. While Apple headquarters in Cupertino, California, still controls the launch of new products and pricing for individual markets, the Indian team led by Dhir and Kaul is now making itself heard. The Apple top brass did not showcase its two upcoming iPhone models, the 5C and 5S, their pricing and possible launch date in India during the meeting. But discussing more serious business plans and seeking ideas is a bold step for a company which has always kept itself shrouded in secrecy, an executive said. Canalys analyst Jessica Kwee said Apple has room to grow in India, but pricing will still be an issue. The Indian smartphone market is growing very fast, boosted by handsets in the sub-$300 segment. So it is unlikely that Apples market share will grow fast per se in India, but in terms of overall volume shipment, we believe there is room for Apple to grow, Kwee said. writankar.mukherjee@timesgroup.com

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Financial services and auto ancillaries have also managed to buck the trend to an extent. While the financial sector in the ETIG sample, led by companies such as Bajaj Finance, Cholamandalam Finance, Dewan Housing Finance, LIC Housing Finance, M&M Financial Services and Shriram Transport Finance, reported a growth of 8.3% in employment in FY13 against 7.7% last year, the number of employees in the auto ancillary industry grew 4.7% against 1.1% a year ago. For these finance companies, aggressive expansion of their businesses to tier II, tier III and rural India, where they intend to tap the unorganised market, has helped maintain their growth pace. Such expansion naturally depends on having more people on the ground. We are expanding in the rural markets and opening new centres in these areas for which we have been hiring manpower consistently, said Umesh Revankar, managing dire ctor and chief executive officer of Shriram Transport Finance (STFL). Rural markets have the potential to generate a lot of business opportunities as the purchasing capacity of the rural population has improved over the past few years due to better minimum support prices (MSP).

INVESTMENT IN OTHER INDIA PAYS RICH DIVIDENDS

The Truly Rural Dancing in the Rain
Stocks of cos with above-normal exposure to rural areas outpace those with an equal split of urban & rural or with less than avg rural presence
JWALIT VYAS & SURAJ SOWKAR MUMBAI India Incs rural champions have probably never had it so good. The best monsoon in 15 years has erased bad memories of last years drought and kindled hopes of a turnaround in demand for key products. At a time when the rest of India Inc is either groaning under heavy debt or struggling to sell in a sluggish market, companies with heavy rural focus are literally licking their lips in anticipation of a surge in demand in Indias villages and towns. Already, two-wheeler sales are inching up, tractor sales are booming and banks are hiring employees in far-flung regions, hoping to benefit from a monsoon that has increased the kharif area by 5% and water reservoir levels by 15%. Deutsche Bank says in a report that years of above-average rainfall have increased rural prosperity and stock markets have responded by pushing up prices of companies with a strong rural presence. But there is an interesting divergence here. Companies with above-normal exposure to rural areas are doing much better than those with an equal split of urban and rural or with less than average rural presence. So, an M&M Financial, with 80% of income from rural areas, is outperforming Bajaj Finance and Shriram Transport; Emami and ITC are outperforming Hindustan Unilever, Heros traditional rural strength is helping its stock race past Bajaj Auto.

Hero Motocorp In the anticipation of the boost in the rural demand on the back of good monsoon, Heros stock has gained 24% in the past three months, while the stock of Bajaj Autom which has a relatively lesser rural exposure, has gained only 10%. In the two-wheeler industry, Hero is the strongest brand in the rural India and has 5,000 distribution points in rural India, the highest in the industry. It derives nearly half of its sales from the rural markets, 20% more than its competitor Bajaj Auto. A strong growth in the rural vis-vis urban areas has helped Heros stock outperform its competitors stock in the year till date. The companys stock has gained 8% in the year till date, while Bajaj Autos stock has remained flat.

Emami In the consumer industry, Emami has one of the highest exposures to the rural markets. Around 60% of its sales and 50% of its profit is from the rural areas. Due to this higher rural exposure, Emamis sales growth has been in midteens over the past five quarters, higher than most of the other consumer companies. Because of this, the companys stock has given a return of 25% in the year till date compared to that of companies with lesser rural exposure such as Marico, Colgate-Palmolive and Godrej Consumer (25-30% of sales from rural). The stocks of these companies have given a return of only 3%, 20% and 8%, respectively, during the same period. A good monsoon means more money in the hands of the rural consumer. This will help the company continue its growth momentum going forward. At the current market price, the companys stock is trading at a P/E multiple of 25, which is much lower than the earnings multiple of most of the other consumer companies.

Maruti After a decline of 10% in the sales volume in the first quarter of the current fiscal, Maruti has seen a jump of 20% in its volumes in the second quarter, thanks to the above-normal monsoon. On the back of stronger growth, the companys stock has run up by 11% in the past one month, after correcting by nearly 20% in the first eight months of 2013. The company has nearly onethird of its sales from the rural and it is expecting this to go up significantly over the next two years. It has a strong brand and network in the rural areas that has helped it grow at double digits in the rural markets despite overall sales being down by 7%. However, with a good monsoon, the sales volumes shot up in the second quarter, the highest in the past four quarters, which will boost the companys earnings. The demand is likely to remain strong and growth, too, will remain high, also because of the lower base effect. Despite gaining 11% in the past one month, the stock is trading at an attractive P/E multiple of 16 as against its one-year average of 22.

Mahindra & Mahindra Like Maruti, M&Ms stock has also run up by 12% in the past one month after correcting over 16% in the first eight months of the current fiscal. The main reason for this is a 33% y-o-y jump in tractor sales volumes in the September month. The companys stock has given a negative return of 5% in the year till date, primarily due to weak demand for the commercial vehicles,

especially the SUV segment. However, a strong growth in the rural segment, is likely to counter the slowdown in other segments, the reason for a strong bounce-back of the stock in the last one month. In the quarter ending June 2013, its tractor, or farm equipment segment, volumes grew 25% yo-y, while the overall volumes grew 7%. The farm equipment segment represents 40% of the topline.

M&M Fin Services One of the largest vehicle financing companies, M&M Financial Services focuses on the rural and semi-rural areas with a majority of its 675 branches being in the rural and semi-rural areas. The rural focus has helped the companys loan book to grow at a CAGR of 39% in the past two years, much faster than its peers Bajaj Finserv and Shriram Transport Finance, which are majorly into SME lending and second hand car finance and have relatively lesser rural exposure. In future, a rise in rural income is expected to increase demand for tractor and passenger vehicles. Over the past two years, the companys loan book has grown by a CAGR of 39%. Due to higher rural income and strong presence, it may continue to increase its loan book at a decent rate this fiscal. M&M Financials stock has gained 14% in the year till date, outperforming its peers Bajaj Finserv and Shriram Transport which have corrected by 34% and 25%, respectively.

ITC Increasing rural contribution and a resilient demand for its products in the urban markets have helped ITCs stock outperform. Rural contribution to sales for ITC is growing at a faster pace than other consumer companies such as HUL and Nestle. The company makes 35-40% of its sales from the rural market, around 5% higher than three years ago. It is witnessing the rural consumers moving up the value chain in cigarette category. Its products have displayed resilient demand even in the slowdown. Considering this, its urban business is less likely to be impacted from the slowdown while its rural business will add to the overall growth of the company. Given this, ITCs stock has performed much better than other consumer giants such as HUL and Nestle, which have lesser rural exposure. For instance, rural is only around 25-30% for Nestle. With better monsoon this year, ITCs stock has run up by 10% in the past one month, while HULs and Nestles stocks have given a return of 2% and 5%.

With a Growing Audience, Multiplex Cos On a Roll

Rising footfalls & ticket prices, penetration beyond metros helped cos grow revenues at over 35% CAGR in the last 3 fiscals, though sluggish construction may hamper growth
RAJESH NAIDU ET INTELLIGENCE GROUP Footfalls at multiplexes increased 1.5 times over the last three fiscals as rising spending power in smaller cities saw more moviegoers flock to such entertainment outlets. This increase has fuelled expansion in the domestic exhibition industry through both organic and inorganic routes. An ET Intelligence Group analysis shows that between 2010-11 and 2012-13, most exhibition companies increased their penetration in tier II and III cities, pushing up the total screen count in the country by 43%. About 90% of these screens were added in malls in the smaller cities. Revenues, too, rose for most companies due to higher average ticket price. Analysts say the trend is likely to continue, given the fastspreading mall culture. Footfall is a measure of how successful a company is at drawing people in. A growing middle class and more disposable income generally drive up footfalls at malls and multiplexes, which are theatre complexes with multiple screens. For multiplex chain operator and segment leader PVR, footfalls increased 2.7 times to 5.4 crore in FY13 from 1.9 crore in FY11. In the same period, its nearest listed rival, Inox Leisure, saw footfalls grow 2.1 times to 3.82 crore. Inox Leisure, which has expanded its screen capacity to 284 in FY13 from 102 in FY11, has 69% of its screen capacity in tier II and III cities. In the last three years, there has been a 15-20% growth in screen capacity every year, as a result of which the industry has added 250-300 screens every year, said Nitin Sood, chief financial officer of PVR. At PVR, 65% of screen expansion has been in tier II and III cities. The good response from emerging cities has also seen exhibition companies increase their average ticket price by 78% to about . 160, which, in turn, has boosted revenues. The last three fiscals have also seen companies revenues grow at an average CAGR (compounded annual growth rate) of 35.2%. Operating profits, too, have grown at a CAGR of 42.7%, reflecting the impact of increasing footfalls and the resultant increase in average ticket price. Consequentially, exhibition companies have now started playing a larger role in overall box-office collections. Analysts attribute the rise in number of films mopping up . 100 crore or more to exhibition companies reaching deeper into tier II and III cities. Of the total domestic collections, close to 60% comes from multiplex screens and the remaining from single-screen theatres, PVRs Sood said. The number of films grossing over . 100 crore jumped to 22 at the end of the first half of the current fiscal from just five in 2011. Another factor aiding higher box-office collection was digital distribution, a mode that ensures simultaneous release of a film across territories. Typically, companies save onefourth of their cost involved in sending 35 mm physical prints when they distribute films digitally, said Smita Jha, leader, entertainment & media, PwC India. This has helped film producers to release a larger number of prints. Hence, they are able to do simultaneous release of films in metros and more deeply in tier II and III cities. This has helped boost overall revenue collection at the box office, especially in the opening weekend. Of the over 15,000 screens in the country, 1,600 are in multiplexes, 6,500 are digitised and the remaining in single-screen theatres. This puts the share of multiplex screens at just 17% of the total capacity. In view of the rise in real estate prices and changing consumer preferences, analysts say

exhibition companies would prefer a larger presence in malls to acquisition of single-screen theatres. Acquiring single-screen theatres does not work for us. First, there is an angle issue with single-screen theatres. Second, there is a vehicle parking issue with single-screen theatres. And lastly, there is an increasing consumer inclination for multiplex kind of environment and crowd, said Sood. However, experts caution that exhibition companies could face challenges in near term due to the slowdown in construction activities. Screen growth depends on growth in commercial realty. At present, there is a slowdown in the construction of malls for the last one-and-a-half years. This may hamper screen capacity of exhibition companies, said Jehil Thakkar, head of media & entertainment at KPMG. The long-term outlook for the industry, however, is positive, given the under-penetration of domestic multiplexes when compared with their western counterparts. We make the maximum number of movies and sell the maximum number of tickets in the world. However, there are only 10 screens per one million Indians. Now compare this with 35 screens per million Europeans and 125 screens per million Americans, said Deepak Asher, director of Inox Leisure. As per a Crisil estimate, the count of multiplex screens in the country will touch 2,200 by 2016. The interest expenses of big exhibition companies are at manageable levels--Inox Leisures interest expenses as a percentage of operating profit was 27% in 2012-13, while that for PVR was 30%. As these companies expand and complete the synergies of their acquisitionsPVR with Cinemax and Inox with Fame their balance sheet might be stretched. rajesh.naidu@timesgroup.com